How to Tell If Your Pension is Enough for Retirement

By Joseph
February 8, 2022

It is natural to have a lot of questions about retirement. You want to make sure that you have enough money to enjoy your golden years, but you don’t want to have to delay retirement too long to accumulate that wealth. So, how do you figure out if your pension is enough for retirement? 

As a side note, pensions are becoming much less common. But you don’t necessarily want to skip learning the answer even if you don’t have a pension and don’t think you’ll get one. After all, there may still be older loved ones in your life who have pensions. They may turn to you for financial advice. 

A Refresher on Pensions

Before figuring out if your pension is enough, refresh your memory on what a pension is. Though it’s less common now, companies used to contribute funds to retirement accounts for every employee. When employees retired, they could choose to either get a lump sum or receive the money in smaller monthly installments. Pensions are typically higher if you worked at a company longer and if you had a higher income. 

Pensions are a foreign concept to many people, as estimates indicate that only 18% of non-governmental employees have pensions. Most pension holders today are in the public sector, such as police officers or teachers, or are part of unions. 

Most companies offer 401(k)s instead of pensions. The important difference is that pensions are funded by employers, while employees fund their 401(k), although some employers contribute as well. 

What Happens to Your Pension If You Change Jobs?

Your pension is tied to your job, so if you change jobs, it does not go with you. You can’t simply transfer the pension to your new company. You also can’t roll it into a 401(k), IRA, or other investment. 

The good news is that the pension will still be there for you when you retire. You just have to contact the company that holds your pension when you retire. 

Can You Count on Your Pension for Retirement?

Before you can even wonder if your pension is enough for retirement, you need reassurance that it will still be there. The economy is changing quickly, and part of the reason that pensions are so rare is that companies just can’t sustain them. 

Depending on your company, you may be out of luck. Your company may decrease how much you receive as your pension. That can make it very hard to plan for retirement and decide whether your pension will be enough. 

However, there is a Pension Benefits Guarantee Corporation (PBGC). Many companies were members of this corporation, and if you worked for one that was, then you will get at least some of your pension. 

Whether you can count on your pension is not set in stone. That being said, people close to retirement will probably get their full pension payment. The chances that you won’t receive the full payment increase if your retirement is further in the future. 

How to Tell If Your Pension Will Be Enough

There is no set answer to whether your pension will be enough for your retirement income, as it depends on you as well as your pension. 

To figure out if your pension is enough, go through the following steps. 

  1. Confirm when you will start receiving your pension payments and how much you will receive monthly. 
  2. Consider other revenue streams, such as mutual funds and IRAs. 
  3. Calculate your combined revenue from those streams and your pension.
  4. Think about your current finances. Specifically, do you have a debt to pay off or mortgage payments? 
  5. Consider what you want to do during retirement. Be realistic about how much money you will need to live your desired lifestyle. 
  6. Combine the debts and lifestyle expenses to see how much you expect to spend per month in retirement. 
  7. Compare this number to your revenue figure. 

If your predicted expenses are less than your projected revenue, then you should be fine. However, remember that your pension may change, especially if your retirement is far away. 

If your projected expenses are higher than your projected revenue, then no, your pension won’t be enough. You should use a reputable retirement planning software package to help you with these types of projections. Software such as WealthTrace is great for consumers as it shows retirement projections where you can enter multiple pensions and even run scenarios on taking a lump sum amount rather than the annual pension amount.

What to Do If Your Pension Isn’t Enough 

So, what do you do if your pension will not be enough for your retirement? 

Some people opt to work part-time during retirement to supplement their income. However, remember that something may happen that interferes with this plan, such as health problems. 

Your other options include reducing your lifestyle expectations during retirement or saving more. Consider if there are ways to save money during retirement or change your expectations. For example, maybe reduce your planned vacations by a week each or think about moving to a smaller home with lower upkeep costs. Moving to a smaller home could also give the benefit of putting a chunk of money into your retirement savings.

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